You will be shocked to know that over 90% of People lose money in the market. Why? Because these people invest in Stocks Blindly without Proper Analysis. There are thousands of companies listed on the Indian Stock Exchanges but not only a few of them are good for Investing. So here comes the Big Question, How to Select Stocks for Investment?
This Quick Fundamental Guide will help you pick stocks for Short term as well as Long Term Investment.
Table of Contents
- 1 Fundamental Analysis of Stocks
- 2 1. Financial Ratio Analysis
- 3 2. Financials of the Company
- 4 3. Stay Updated with Financial News
- 5 4. Management and History of the Company
- 6 5. Competitive Advantage Over Peers
Fundamental Analysis of Stocks
For many investors, Fundamental Analysis of the stock is the process of finding the stocks of the company they want to invest in, by analyzing the fundamental values. The fundamental analysis includes knowing the fundamental characteristics of the stocks. This is something that an Investor should know to be able to pick stocks for investing.
When you want to do the Fundamental Analysis of stock, you need to focus on the overall strength of the company. There are different ways that you can perform the Fundamental Analysis of the stock and this is done through the use of fundamental analysis Techniques.
Through this post, we’ll explain 5 Basic Research Steps that you should follow before Picking Up Stocks for Investment Purpose.
1. Financial Ratio Analysis
There are Few Ratios that reflect the Overall Fundamentals of a Particular Company. You can find these Ratios of Stocks on any of the Stock Screening Portals like Moneycontrol, Tickertape, Screener, etc.
Here are some key Ratios and their trends that you should consider Before Investing in Stocks:
- Debt to Equity Ratio (DE): Should be less than 1 (Lower the Better)
- Price to Earnings Ratio (PE): Should be lower than competitors and Industry Average
- Price to Book Ratio (P/B) – Low compared to the companies of the same sector
- Return on Equity (ROE) – Should be greater than 15% for the past few years
- Earnings Per Share (EPS): Should be Increasing for last 5 Quarter
- Price to Sales Ratio: Smaller Value is preferred.
2. Financials of the Company
The foremost thing that you need to do is to check is whether the Profits and Revenue of the Company have been increasing or decreasing. Then, you need to check if the assets of the company have increased or decreased over the past few years. Stocks with a steady Increase in Revenue, Profits, and Assets are the ones you can go long on.
3. Stay Updated with Financial News
Stock Markets are driven by the Sentiments of the People. If there are Positive News coming for a Company, then people will have Positive Sentiments for the Company (for Example Reliance Industries, HDFC Bank, etc). If there is negativity surrounding a Company, then Investors will be having negative Views about that Company (Anil Ambani Companies).
So you need to be aware of Financial News like- The company got Big order from a Client or the Company is partnering with some Big International Companies or If Govt. launched a Scheme or Incentive which would be beneficial for a Particular Company or Sector in the Long Run.
You can read Financial News from Sites like Moneycontrol, BloombergQuint, Economic Times etc.
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4. Management and History of the Company
One of the important steps while picking Stocks for investment is to find out about the History of the company. You need to find out what was the purpose of starting the Company and who are the Promoters of the Company. You also need to check the operational strategy of the company.
You should search a bit about the Top Officials like CEO, CFO, MD of the Company along with their qualifications and past experience of the Company. Also, try to see the quality of products and reliability of management. You need to avoid Penny Stocks and companies with questionable management.
5. Competitive Advantage Over Peers
Companies having Monopoly in the Sector tend to be Perform Better. You need to find about the Unique Selling Point of the Company’s Products. You should find such companies which are having a Competitive Edge over the other Companies of the Same Sector. For Example, HDFC Bank and SBI Banks in Banking Sector, JSW Steel & Tata Steel in Steel Sector, Maruti Suzuki and Tata Motors in Cars Sector, Airtel in Telecom Sector and so on.
BONUS TIP: Avoid Extremely High Beta Stocks, Stocks with a Market Capitalisation of less than 500 Crs as the prices of such stocks can be highly volatile. During the market correction, such stock prices fall drastically.
This was all about
How to Select Stocks for Investment or How to Pick Stocks for Investing on the Basis of Fundamentals
I hope we were able to give you a quick Guide on how to select stocks for investment on the basis of Fundamental Analysis. If you have any doubts about any of the Steps mentioned in the post, Comment below.